The global crude oil demand is set to surpass its 2019 peak of 100.5 million barrels a day. International Energy Agency (IEA), the Paris-based energy watchdog, said in a monthly report that it expects oil demand to grow to a record 101.9 million barrels a day this year.
Emergent and resurgent Asian economies, such as India and China, are expected to drive most of the increased global energy appetite. An earlier-than-expected return to growth for Europe is also expected to keep demand high.
While global oil demand is expected to keep rising until the middle of the next decade, the global energy map has been redrawn since the conflict between Russia and Ukraine began a year ago. With Russia announcing a voluntary production cut of 500,000 barrels a day in response to Western sanctions, supplies remain constrained amid hostilities set to intensify in the spring.
However, the current macroeconomic and geopolitical climate has been nothing short of a windfall for U.S. energy producers, with Europe’s increasing reliance on American shipments feeding the Texas export boom. The growing influence of the United States as a global price maker would be further underscored by the formal addition of Texas-produced crude to the Brent complex, the global benchmark, in June.
According to Peter Keavey, CME Group’s global head of energy and environmental products, West Texas Intermediate crude, or WTI, “has become the most important marginal pricing barrel on the globe,” while adding that the United States has “gone from (being) a very domestically focused market into an international powerhouse.”
In view of the above, we think it could be wise to consider investing in fundamentally sound energy stocks, Valero Energy Corporation (VLO), Marathon Petroleum Corporation (MPC), and Unit Corporation (UNTC).
Valero Energy Corporation (VLO)
VLO is involved in manufacturing, marketing, and selling transportation fuels and petrochemical products in domestic and international markets. It operates in three segments: Refining; Renewable Diesel; and Ethanol. Its offerings include conventional, premium, and reformulated gasoline; California Air Resources Board (CARB) gasoline and diesel; and other refined petroleum products.
On January 31, VLO and Darling Ingredients Inc (DAR) announced their investment decision on a Sustainable Aviation Fuel (SAF) project at the DGD Port Arthur plant, which is owned and operated by Diamond Green Diesel Holdings LLC, a 50/50 joint venture between VLO and DAR.
With an estimated cost of $315 million, with half the amount attributable to VLO, the project is expected to be complete by 2035. Thereafter, the DGD Port Arthur plant will be able to upgrade approximately 50 percent of its current 470 million gallons annual production capacity to SAF, which is expected to make it one of the largest SAF manufacturers in the world.
Also, on January 31, VLO announced an increase in its quarterly cash dividend on common stock from $0.98 per share to $1.02 per share. The dividend is payable on March 16, 2023.
With this increase, the annualized cash dividend rate on VLO’s common stock has been raised to $4.08 per share. This translates to a yield of 2.92% at the current price. The company has increased its dividend payouts at 6.4% CAGR over the past five years.
VLO’s revenues increased 16.3% year-over-year to $41.75 billion in the fiscal 2022 fourth quarter ended December 31, 2022. During the same period, the company’s operating income improved 169.4% year-over-year to $4.30 billion, while its adjusted net income amounted to $3.2 billion, up 223.9% year-over-year.
The company’s adjusted quarterly earnings per share came in at $8.45, registering an increase of 250.6% from the prior-year period.
VLO’s trailing 12-month return on common equity of 57.15% is 172.5% higher than the industry average of 20.97%. The company’s trailing 12-month return on total capital (ROTC) of 28.03% compares favorably with the industry average of 8.50%, while its trailing 12-month return on total assets (ROTA) of 19.43% also beats the industry average of 7.01%.
Analysts expect VLO’s revenue for the first quarter of fiscal 2023 to increase 4.6% year-over-year to $40.30 billion. During the same period, the company’s EPS is expected to increase by 190% year-over-year to $6.70. VLO has also impressed by topping the consensus estimates in each of the trailing four quarters.
The stock has gained 21.8% over the past six months and 54% over the past year to close the last trading session at $136.37. Despite the recent uptrend in its price, in terms of forward P/E, VLO is currently trading at 6.43x, 21.7% lower than the industry average of 8.21x.
VLO’s strong fundamentals have earned it an overall A rating, which translates to a Strong Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VLO also has an A grade for Momentum and a B for Growth, Value, Sentiment, and Quality. It is ranked #4 of 91 in the B-rated Energy – Oil & Gas industry.
Click here to see all POWR Ratings for VLO.
Marathon Petroleum Corporation (MPC)
MPC is involved in midstream and downstream businesses, such as petroleum product refining, marketing, and retail in the United States. The company operates through two segments: Refining & Marketing and Midstream transport.
On January 27, MPC declared its quarterly dividend of $0.75 per share of common stock, payable on March 10, 2023. The company pays $3.00 annually as dividends, which translates to a forward yield of 2.33% at the current price. Dividend payouts have grown at a 10.4% CAGR over the past five years.
In addition to paying out $1.3 billion as dividends, MPC returned another $11.9 billion of capital to shareholders in 2022 through share repurchases. This brought the total repurchases to almost $17 billion since May 2021. In addition, the company also announced an incremental share repurchase authorization of $5 billion. As a result, the company has $7.6 billion in remaining repurchase authorization.
For the fiscal year, which ended December 31, 2022, MPC’s total revenues and other income increased 48.8% year-over-year to $179.95 billion, while its adjusted EBITDA from continuing operations increased 171.7% year-over-year to $24.34 billion due to improving operational and commercial execution as the refining system operated at 96% utilization to meet demand.
As a result, adjusted net income attributable to MPC came in at $13.50 billion or $26.16 per share, compared to $1.56 billion or $2.45 per share during the previous fiscal.
MPC’s trailing 12-month ROCE, ROTC, and ROTA of 55.01%, 20.21%, and 16.18% surpass the respective industry averages of 20.97%, 8.50%, and 7.01%.
Analysts expect MPC’s EPS for the first quarter of the fiscal year 2023 to come in at $5.25, compared to $1.45 during the previous-year period. Moreover, the company has surpassed its consensus EPS estimates in each of the trailing four quarters.
MPC’s stock has gained 1.8% over the past month and 32.7% over the past six months to close the last trading session at $127.11. Despite the recent uptrend in its price, in terms of forward P/E, MPC is trading at 6.99x, 14.9% lower than the industry average of 8.21x.
MPC’s overall A rating translates to a Strong Buy in our POWR Ratings system. It also has an A grade for Quality and Momentum and a B for Growth.
MPC ranks #3 of 91 stocks in the B-rated Energy – Oil & Gas industry. Click here to see additional POWR Ratings for Value, Sentiment, and Stability for MPC.
Unit Corporation (UNTC)
UNTC explores, acquires, develops, and operates oil and natural gas properties in the United States. The company operates through its three broad segments: Oil and Natural Gas; Contract Drilling; and Mid-Stream.
On January 31, UNTC paid its shareholders a special cash dividend of $10 per share. In addition, the company also announced a quarterly cash dividend policy, beginning in the second quarter of the fiscal, with an initial payout of $2.50 per share.
For the third quarter of the fiscal year 2022, which ended September 30, UNTC’s total revenues came in at $120.28 million, while its income from operations increased 39% year-over-year to $66.26 million. During the same period, the net income attributable to UNTC came in at $55.82 million or $5.60 per share, compared to $6.30 million and $0.55 per share during the previous-year quarter.
UNTC’s trailing 12-month ROCE, ROTC, and ROTA of 69.92%, 34.04%, and 36.09% compare favorably with the respective industry averages of 20.97%, 8.50%, and 7.01%.
The stock has gained 2.4% over the past six months and 22.3% over the past year to close the last trading session at $50.89. This is 3.04 times its trailing 12-month earnings, which is 65.1% lower than the industry average of 8.69x. This indicates more headroom for potential upside in the stock.
UNTC’s promising outlook is reflected in its overall POWR Rating of A, translating to Strong Buy in our proprietary rating system. It also has an A grade for Momentum, Value, and Quality.
UNTC is ranked #6 in the same industry. Click here for additional ratings on Growth, Stability, and Sentiment for UNTC.
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VLO shares were trading at $134.89 per share on Thursday afternoon, down $1.48 (-1.09%). Year-to-date, VLO has gained 7.11%, versus a 7.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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